Sunday, April 26, 2009

Housing Market is Not "Special"

In many markets, housing is starting to "rebound" off of disastrous sales numbers.  Many so-called experts are saying that this reversal in sales signals a bottom in the housing market and that now is a great time to buy.

I always have to wonder why people think of housing as some sort of special asset class.  Yeah, yeah.  I know you cannot live in a stock and you do not get a tax write off investing in gold.  But I am talking about housing strictly has an asset class.  If you wish to talk about housing as an investment than you have to look at it as a market not unlike the stock market.  The asset has a price.  There is supply and demand and there is an ask and a bid price.

In no market of investments do prices ever go straight down.  This is always true in both the short and medium term.  Just look at the fluctuation of prices in a given hour.  Even when a company announces horrible news, the stock price does not just go straight down to a new low and stay there.  All along the way, there are people who incorrectly place a bid at a price much higher than where the stock price eventually settles.  Just look at GM's stock chart.  They and the government have basically announced that the company is going to go into bankruptcy.  At the very least, all the equity is going to be wiped out.  Yet the stock still trades and there are still rallies.  There have probably been no less than four big rallies in that stock over the last year even though the news continuously gets worse.

This is the first time that housing sales have "rebounded" and trended up.  Yet everyone wants to say that we have wished bottom.  There is no doubt that there are several people who have been anxiously waiting to get into the market.  Heck, I am one of these people. They see prices down 25% or even 40% and they want to jump in.   Some of them will and sales will go up.  But that does not mean we have reached the end of a bear market.  There is plenty more downside here as we work through excess inventory and credit standards continue to rise price people out of the market.

So don't buy the news.  We got plenty more of room on the downside.  If you look at the stock market over the last decade, we are just right back where we started.   And this does not even account for inflation.  Why should housing be any different?  We are still well above pricing levels from a decade ago.  Just in my neighborhood, prices are still almost double what they were a decade ago and this is AFTER a 30% pullback.  What makes anyone think we will not go down even more?

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